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1. Establish “gain sharing”
For Dittman, it’s all about “gain sharing,” or a mutually beneficial arrangement that is nurtured over time.

“Gain sharing is often a second phase, implemented after the relationship matures to some extent,” says Dittman. “About one-third of all 3PL contacts have gain sharing arrangements. Most gain sharing relationships are based on a 50/50 sharing of cost savings, while some have an incentive payout if key performance indicators are met.”

But agreeing on a method to measure cost savings against a base line is challenging, admits Dittman, and is the main reason gain sharing arrangements are not used. “Those managers that are experienced with it believe strongly that an arrangement should be initiated only after the 3PL has demonstrated that it can meet all of the performance requirements expected.”

Dittman adds that once performance expectations have been met, and a good cost baseline (cost/unit shipped) has been documented, it should be possible to move forward with a plan to share 50/50 in the cost savings proposed and implemented by the 3PL. Service level credits can also be considered.

“A major variable in establishing a gain sharing formula is whether or how to factor in normal inflation,” says Dittman. “For example, if a logistics cost index goes up 3 percent and actual cost/unit stays flat, does that mean a 3 percent savings was achieved?” Dittman adds that the downside of waiting a year or more to initiate a gain sharing arrangement is that the 3PL may withhold its cost savings proposals until a gain sharing deal is begun.

About the Author

Patrick BurnsonExecutive Editor

Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at .(JavaScript must be enabled to view this email address).

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